In 1989, the Tiananmen Square massacre had forced the Communist Party of China (CCP) to bring about a paradigm shift in its economic ideology as the country embraced economic and social liberalisation in order to convince people that with economic benefits, they can live a comfortable life under the CCP regime.
More than three decades later, China is facing the biggest crisis for survival since the Tiananmen Square massacre of 1989- the Coronavirus Pandemic has caused a global backlash and the Semi-Autonomous Region of Hong Kong that is the key to Beijing’s economic boom is witnessing vocal pro-Democracy protests that have garnered attention across the world.
Xi Jinping plans to counter this with another paradigm shift- a highly Capitalist Free Trade Zone in the country’s southern province of Hainan to rival Hong Kong. The president reportedly said, “institutional integration will be prioritized to free people’s minds to make bold innovations and ensure sustainable progress.”
China’s highly autocratic Communist regime and State dominance in certain industries hasn’t allowed foreign firms to prosper. China’s Free Trade Zones haven’t really kicked off. And this is why Hong Kong is crucial to China. Hong Kong is a system different from China- it guarantees some measure of liberties and freedoms which allows it to negotiate trade and investment deals independently of Beijing.
Hong Kong, for example, doesn’t have to pay tariffs that the US imposes on Chinese products. For years, China has used Hong Kong’s currency, equity, and debt markets to attract foreign funds, while for the rest of the world, Hong Kong is the gateway into mainland China. The bulk of FDI inflows into mainland China are channelled through the Semi-autonomous region.
Losing the massive financial market that Hong Kong is, can prove catastrophic for Beijing. Recently, when the US Senate passed a Bill to delist Chinese companies, they were forced to turn towards the Hong Kong Stock Exchange for raising capital.
The pro-democracy protests in China have rocked the CCP regime, therefore it is looking at this island to create a new financial market for itself- one that allows a Capitalist system to prosper without giving the people of the region any democratic freedoms or individual liberties, unlike Hong Kong.
Hainan is a natural choice for Beijing, as the island is China’s southernmost and smallest province. With a number of beaches and other attractions, Hainan boasts of a thriving hotel and tourism industry.
It is also strategically located- almost 500 kilometers away from Macau and Hong Kong, and therefore in the immediate vicinity of the Greater Bay Area- Beijing’s vision of a megapolis that connects the two Special Administrative Regions of Macau and Hong Kong, as well as nine cities in China’s coastal province of Guangdong- Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing.
Chinese state media and top officials claim that the plan of developing the country’s freest trade zone in the subtropical island is not aimed at Hong Kong. They claim that it is only going to complement and bolster Hong Kong’s position as a favourable trading destination.
Lin Nianxiu, a Deputy Director of top state planning agency, the National Development and Reform Commission said, “The free trade area of Hainan will have a different status, unlike that of Hong Kong.” He added, “It will focus on industries different from those in Hong Kong.” He also said that the free-trade zone that will come up in Hainan will focus on tourism and hi-tech industries.
But the devil lies in details, as the Communist Party of China (CCP) mouthpiece Global Times has written, “Given that the Hong Kong Special Administrative Region has served as China’s largest free trade port but is now being threatened by the US with revocation of its special privileges, there are rising concerns that Hong Kong’s future status and role are under a cloud, and the city may even be replaced by Hainan.”
As pointed out earlier, Beijing is desperately dependent on Hong Kong due to its massive financial market especially when the US threatens to delist Chinese companies. This is why the city remains indispensable for China despite its economy being only 2.7 per cent the size of mainland China’s economy. It is this financial market that China wants to bring into Hainan from Hong Kong.
By turning Hainan into a massive “free trade port” boasting of lower income tax rates and relaxed visa requirements, Beijing wants to achieve two specific requirements- firstly, it wants to offer something new to the world. The US has curtailed ties with Hong Kong and other free-market democracies too could follow.
The fact remains that the West invested in Hong Kong because they envisioned a different political and economic system in the city. But Beijing has stamped down upon pro-Democracy protesters and is now imposing a National Security law to curb dissent. The West might no longer want to give China the funds that it channelizes through Hong Kong.
Secondly, Beijing is becoming more and more assertive about the fact that it wants to give up the “One Country, two systems” model of governance. China wants a free-trade port within mainland China so that the Communist system of Beijing doesn’t have to sustain a partly democratic system any longer.
China’s plans are ambitious and far-reaching but there are logistical issues and practical bottlenecks involved. China’s free-trade zones have failed to shine till now, as all eighteen such free trade areas, including the six that were added last year, haven’t been able to kick off.
The autonomy of the local authorities has vastly reduced due to centralised CCP control in the country. To make matters worse, foreign firms complain of restrictions and State dominance in certain industries. Moreover, the scope of such free trade zones has remained limited because of the extensive negative list of sectors in which foreign investment is restricted.
Hainan is different from other Free Trade zones, and a paradigm shift in Beijing’s policy. The CCP is ready to cede space when it comes to economic and financial controls at par with Hong Kong, but at the same time, China is making it clear that it wants the democratic world’s investments without democratic liberties and freedoms.
China is desperate and this is why the Communist regime is going against its ideology by allowing a totally capitalistic system in the Hainan province. In the long term, it might only backfire because, with increasing economic prosperity and foreign investments, Beijing might create another Hong Kong for itself in Hainan. A huge financial market in Hainan is still far away, but once it happens the Communist regime might no longer be able to control the rise of democratic sentiment in a prosperous Hainan.